The Cassidy Law Firm Blog

Can I discharge my student loans in a bankruptcy action?

Most college graduates today exit with considerable student loan debt. Over 44 million Americans owe student debts which amount to some $1.5 trillion, according to financial website Make Lemonade. The average student loan borrower today will have $37,172 in debt, an increase of $20,000 from 13 years ago. Student loan debt can be crippling, preventing graduates from saving money, buying a home, and establishing themselves. Unfortunately, bankruptcy laws have traditionally not benefited students drowning in student loan debt. This may all change with the evolving opinions of bankruptcy judges.

The Student Loan Exclusion

Student loans have grown to be the second highest consumer debt, surpassing credit card debt and dwarfed only by mortgages. Before 1976, you could discharge your student loans in bankruptcy. However, Congress changed the laws. Now, student loans are treated differently than other major debts when it comes to bankruptcy. The reason behind this likely stems from a fear that students could take advantage of bankruptcy laws by taking out a large amount in loans only to declare bankruptcy later on.

Under current bankruptcy laws, it is possible, though difficult, for a student to discharge his or her debts. Most bankruptcy courts will apply the Brunner test, or a similar test. The borrower must show that extenuating circumstances have created a hardship to repayment, these circumstances are expected to continue, and the borrower has made good faith efforts to repay the loan. Usually there are limited circumstances that may allow for discharge, such as when the borrower becomes disabled.

Changing Views on Student Loans

Recognizing the huge segment of the American population who is struggling under student loan debt, many judges are expressing a desire to help student loan debtors. The Wall Street Journal reports that some judges, both Democratic and Republican, want to alleviate the burden of student loan holders. Judges across the country are taking action, such as encouraging bankruptcy attorneys to represent student loan debtors free of charge, canceling private loan debt for unaccredited schools, and allowing student loan borrowers to repay loans in a Chapter 13 plan. For now, student loan holders who are unable to make repayments should contact a bankruptcy attorney to determine whether they have any cause of action.